HMRC collected a record £8.5 billion in Inheritance Tax over the 2025/26 tax year, and frozen thresholds are doing a lot of the work – the nil-rate band (£325,000) and residence nil-rate band (up to £175,000) have both been frozen for years, and the Autumn Budget 2025 extended that freeze further still, to April 2031. One threshold in particular is worth knowing about if your estate is anywhere near the higher end: once it passes £2 million, the residence nil-rate band doesn’t just stay put, it starts disappearing.
How the taper actually works
The residence nil-rate band – up to £175,000 when a main home passes to children or grandchildren – reduces by £1 for every £2 an individual’s estate sits above £2 million. Cross £2.35 million and it’s gone completely, on top of whatever Inheritance Tax is already due on the rest of the estate. For a married couple or civil partners, each person’s estate is assessed against this threshold in its own right, so it’s entirely possible for one spouse’s estate to keep the full residence allowance while the other’s has tapered away, or for both to lose it if each individually crosses £2 million. It’s a genuinely easy detail to miss: knowing your combined nil-rate bands are healthy doesn’t tell you whether the residence element has quietly tapered away on one side.
Why £2 million is closer than it looks
A £2 million estate sounds like a lot until you actually total up a family home in the South East or South Coast, a pension, savings and investments built up over a working life, and perhaps a second property or a share portfolio. Property values alone have pushed plenty of otherwise ordinary estates toward this threshold without anyone actively planning for it, simply through decades of ownership and growth.
The change that will push more people over the line
From 6 April 2027, most unused pension funds will be added to your estate for Inheritance Tax purposes for the first time. For anyone whose estate currently sits just under £2 million once their pension is left out of the sum, this is the change that could tip them over it – not because anything else about their wealth has changed, but because a pot that’s always sat outside the calculation is about to be brought inside it. This is exactly the kind of estate where a proper review before 2027 matters most, since the taper doesn’t apply gradually and gently – it removes allowance at twice the rate of whatever pushes you over the threshold.
What’s worth doing about it
Once you know where your estate actually sits against this threshold, the usual toolkit applies – gifting, trusts, charitable giving, and life insurance in trust among them. We’ve set out that fuller picture in our guide to reducing Inheritance Tax, so rather than repeat it here, the more useful first step is simply establishing whether the £2 million taper actually applies to you – and, if it’s close, what the 2027 pension change is likely to do to that number.
Let’s find out where you actually stand
Find out more about our Inheritance Tax planning services here
We work with clients across Poole, Bournemouth and the wider Dorset area to calculate a realistic estate value, including how the 2027 pension change is likely to affect it, well before it becomes urgent. If you’d like your own position reviewed, get in touch and we’re happy to have a no-obligation conversation.
This article is for general information only and does not constitute financial or tax advice, which should be based on your individual circumstances. The information is aimed at retail clients only. All information is correct at the time of writing (September 2026) and is subject to change in the future.
Tax treatment depends on individual circumstances and may change in the future. The Financial Conduct Authority does not regulate Inheritance Tax planning, trusts or will writing.